Saving, as a habit , has been a part of the human psyche since Stone Age. Even when surviving in caves, humans had the basic understanding to store or save their resources and utilise them in need. But all this while, we were never taught how our resources would or in today’s age, money will grow with time. The money that you invest fetches you additional monetary returns as years pass.
But there are several factors to be considered before and after investing your money.
Evaluation of Investment Products
There is always going to be a certain level of uncertainty that affects the ultimate outcome of any investment. That is something we cannot control. But we can control the quality of our investment decisions.
Below are some factors to be considered while evaluating your investment products:
- Investment Period –It is important to understand the time period of investments. There are many investment products which have a lock-in period. For e.g.: Equity Linked Saving Scheme (ELSS) mutual funds have a lock-in period of 3 years before which you cannot withdraw the money. Hence, if your financial goal is a short term goal, for less than 3 years, you would most likely not invest in ELSS mutual funds. ELSS are tax saving funds, which are very popular among the salaried class as investing in these funds help reduce your tax liability.
- Risk - Any decision is a risk. As investors, your decision will either result in making or losing money. To make a good decision, we need to know what risk we are taking, why we are taking it and what the expected outcome is. Knowing those things will allow us to evaluate the decision in the future.
- Cost – There are several costs that you might have to bear as an investor. These could be brokerage fees, one time charges, transaction charges, pre withdrawal charges, etc. You need to consider these costs before investing in any financial instrument.
- Returns – We invest to earn returns. Hence, evaluating the investment returns is a very important step. Study the returns that various short, medium and long term products offer and invest according to your goals. For eg: If your long term goal is to get high returns and you have good risk taking ability, then you may invest more in equity mutual funds or directly in the stock market.
- Liquidity- Liquidity means how easily you can convert your investment into cash. Depending on your financial goals, you need to evaluate whether you require a more liquid or less liquid investment product. Usually, for short term goals, we require more liquidity. Hence, it will be advisable to invest in Instruments Bank recurring deposits, Shares of top companies or mutual funds wherein there is no lock-in period and you can easily sell investment and get cash. On the other hand, investments like real estate are not liquid as there is no guarantee that you will be able to sell the investment instantly and receive cash.
- Tax- There are various investment products which offer tax benefits. If your goal is tax saving, then you need to evaluate the products which offer you these tax benefits. There are several tax saving instruments including government sponsored schemes like National savings certificates (NSC), public provident fund (PPF) or even tax saving mutual funds (ELSS). These products offer double benefits with lower risk.
- Inflation Rate - Aside from the traditional reasons such as a strong source of secondary income, emergency savings, tax benefits, why does it become so important to invest? It is because we all save to account for a very important factor and that is inflation. Your investment should beat inflation. Hence, choosing investment products which provide you returns higher than the inflation rate is very important. However, you also need to consider the risk involved and generally, investments which give high returns also have higher risks associated with them.
- Volatility- You need to evaluate how volatile your investment is. Instruments like exchange trade funds or bonds issued by companies which have a high risk of default, offer higher returns but are more volatile whereas instruments like debt mutual funds or government issued securities are less volatile but offer lower returns. Hence, you must select the right investment options post evaluating the market volatility of these products and your financial goals. There should be a correct balance of equity and debt instruments. As it is rightly said never put all your eggs in one basket.
